Saudi Aramco Oil Company - Case Study Example

Running Head: Saudi Aramco Oil Company Your name Course name Professors’ name Date Introduction This paper begins by carrying out an overview of Saudi Aramco with reference to both extraction and distribution of oil around the globe. The next section covers on marketing information. Apart from its local market network, Aramco distributes the hydrocarbons to international market with the United States in the lead. The essay will also cover financial details of the company, which is obtained from the latest annual review. Saudi Aramco supply chain and ways in which Information Technology has been used to streamline operations in the company will be covered explicitly. Finally, the paper discusses two recommendations that are applicable to Aramco Company limited. Company Overview Saudi Aramco is owned fully by the Government of Saudi Arabian Oil and headquartered in Dhahran. This renowned company was established in 1933, when Saudi Arabia and Standard Oil of California signed a concession to survey oil. It is the world’s largest oil company in terms of output and manages natural crude oil resources. Aramco specialises in the exploitation, production, and distribution of crude oil, petrochemicals, and natural gas. Oil production plants are located in Abqiq, Yanbu, and Juaymah while the solely owned refineries are in Jeddah, Ras Tanura, Riyadh, and Yanbu. Arabian Gulf and Red Sea are the major export shipping terminals whilst local demand for these petroleum products is met through a wide network of refineries located in strategic places. Saudi Aramco has infiltrated USA, South Korea, Japan, and China subsequently establishing joint ventures and investment in the field of refining and marketing. The company has representative offices in Kuala Lumpur, Malaysia and Shanghai China that pursues marketing and sales. Saudi Aramco own and operates largest oil tanker fleet through affiliate Vela International Marine. Market information Saudi Arabia is known to be the world largest producer and exporter of petroleum liquids. It is second to Russia in production of crude oil. In appreciation of the fact that Aramco has the responsibility of producing oil in Saudi Arabia, it possesses 100% market share. It is clear from the company overview that Aramco controls both oil production and refinery markets. In the refining field for example, Aramco maintains Joint Ventures with several international companies. USA is the major export destination for Saudia Arabia’s oil. In 2009, local demand for oil and gas products was 2.4 million bpd and this capacity was wholly supplied by Aramco (Saudi Aramco Annual Review, 2009). In terms of capacity, the largest supplies of crude oil needs are Saudi Arabia, Iran, Iraq, Kuwait, Venezuela, and the UAE in that respective order. Russia, Iran, Qatar, Saudi Arabia, USA, the UAE, and Nigeria have the largest reserve of natural gas. Financial analysis Normally, Aramco fiscal year ends on December 31. It is vital to note that 2008 global financial crisis had a negative impact on oil prices such that there was a droop in the prices of crude oil by about 60% from $145 per barrel in July 2008 to $85 per barrel in 2009 (Saudi Aramco Annual Review, 2009). The price of crude oil has therefore remained unstable, varying by more than $20 per barrel. Declining demand, mainly in the Western Jeddah region affected sales. Diesel and fuel oil were less demanded products between 2008 and 2009. Nevertheless, the decline was not proportional to the world financial crisis simply because of long-term contracts. In 2009, crude oil production was slashed by 11.6% while the product’s export also decreased by 17.9% (Saudi Aramco Annual Review, 2009). On the contrary, production of Natural Gas Liquids in the same year was affected minimally by demand cuts hence increased by 1.9% as compared to 2008. This increased demand was motivated by Aramco internal demand. At the same time, Natural Gas liquid production for sale declined slightly by 2.3% in 2009. Propane has the largest percentage of production in the Natural Gas Liquids category. The sales details, obtained from Saudi Aramco Annual Review of 2009, are summarised in appendix section. Saudi Aramco Supply Chain Management Control of purchases & inventory and Projects & Strategy sourcing are two major purchasing operations carried out at the headquarters in Dhahran. Smaller purchasing offices are also located in Japan, China, USA, and the Netherlands. Apart from its core duty of controlling purchases, the small offices recruits workforce and inspect service provision. While referring to supply chain, the main office directs the entire enterprise in Procurement, Contracting, Material Planning & System Development, Logistics, and Distribution. Aramco Service Company, a subsidiary located in Houston, collaborates with suppliers and contractors in the West to acquire materials and services that are needed for Saudi Aramco’s plant around the world (Marcel, 2006). Additionally this subsidiary company is responsible for recruiting professionals for the operation of parent company in Saudi Arabia. In a bid to expand its international market for hydrocarbons, Aramco Overseas Company (AOC) opened new offices in China and India. These new offices further functioned as a leading source of goods, equipment, and expertise. It is essential to note that the head of procurement in Aramco is also the Vice President. The consultants, supervisors, contracting representatives, and business analyst comprises the staff members in the procurement and supply chain. According to Ahmed Al-Zayyat, Systems Applications and Products (SAP) software was implemented with intent to integrate applications and data across various functions. The effect of this arrangement was an improvement of efficiency and optimization. Besides, adoption of SAP led to fast decision making in production and sales departments. The process of producing oil, refining it, storing, and then transporting the product is a complex process. This validates the need for a comprehensive information system that can handle customer’s transactions through sales order processing, supply planning, & optimization, scheduling, and billing. The SAP offered industry solution for all Aramco business functions in just a single software environment. It enabled exchange vital of information with other systems within Aramco including management of inventory, pipeline batching, and worldwide quota management (Jaffe, 2007). SAP allows for the alignment of supply and production with demand in the market consequently achieving optimum results that have positive impact on both the business and the customer. Streamlined Operations Introduction of SAP application has led to several benefits including elimination of paperwork, eradication of data entry duplication, and replacement of previous storage tower of information. Presently, all employees in the company work with the same kind of information whilst audit trail is sold. Additionally, with SAP, Aramco is now capable of taking full control of information flow. While using internet technology, users can trace orders and transactions related with an order until the final stages of billing and settlement. By using a distinct data resource for reporting, Aramco is flexible to respond quickly to dynamic changes in business and market environment. Increased effectiveness of scheduling, greater inventory visibility and forecasts that are more precise, automatically gives rise to cost savings (Stecke, 2009). Aramco Overseas Information technology Aramco Overseas Company has adopted Information Technology solutions with an objective of providing and managing smooth operation of materials, technologies, and services (Vitalis, 2006). By developing innovative IT products and services, value is created since operations are made efficient and cost effective. The primary services that are currently provided by the Aramco IT capture the area of customer support for all users and contractors, telephony service provision, and support for aforementioned SAP application. Moreover, IT services are integrated in server and workstation set up and in the management and administration for Aramco locations. ICT is also vital in management of Aramco network and purchase of both hardware and software. In brief, the mission of Aramco ICT is to provide general support for IT, SAP support in all areas of operations, and further maintain reliable and secure network environment (Marcel, 2006). Recommendations Several companies around the world examine their internal operations and evaluate areas of the supply chain that needs improvement. In Europe, businesses focus on aspects that can lead to reduction of costs and increased revenue. The first recommendation for Aramco Supply Chain is centralization of distribution and transportation. Integrating and centralising of supply chain leads to efficiency and improvement of bottom line operation. While paying attention to product mix in oil production and distribution, analysis and integration of supply chain would reduce number of location, decrease inventory, and enhance process along the supply chain. If transportation were centralised, there would be an opportunity to consolidate loads and reduce service providers thus lead to volume discounts, tighter partnerships, enhanced customer services, and likelihood of lower costs per unit. The second recommendation is to outsource some of the business activities such as IT and support through nearshore and outshore outsourcing. In the case of nearshoring, there is bound to be lower travel costs for project support and fewer problems with travel documents especially in the context of numerous business trips. Problems related with the recommendations Even though outsourcing reduces costs, it makes management of supply chain a difficult task. Outsourcing makes the process of capturing data regarding product quality, supply and manufacturing output a difficult experience for management. According to McKinsey and Company analyst, companies that have developed the criteria of outsourcing have lost touch with critical data. Nevertheless, careful investment in IT can generate crucial links. In terms of centralization, workload is increased in a few sections of the supply chain. This means that management responsibility is increased whilst the rate of making decisions is decreased. It is important to note that at this stage decentralization pushes the responsibility of making decisions to other levels contrary to a centralised system. Conclusion It is evident from the paper that Aramco is the world’s leading oil producer and distributor. To execute effectively its extensive activities, the company has to integrate technology that streamlines its operation. The essay recommended a centralised transportation and distribution in addition to outsourcing IT and Support. Modern logistic technology increase efficiency by consolidating procurement and distribution at all levels thus shorten processes by eliminating intermediate levels and putting services to customer as the focal point for the organization. Appendix 1 Domestic Product Sales by Region (barrels) 2009 Central Eastern Western Total LPG 1,670,694 5,915,059 5,622,197 13,207,950 Gasoline 53,193,402 29,079,722 62,849,932 145,123,056 Jet Fuel/Kerosene 7,522,249 2,801,279 11,917,907 22,241,435 Diesel 62,963,488 47,171,946 104,712,051 214,847,485 Fuel Oil 598,344 7,878,260 74,540,643 83,017,247 Asphalt & Misc. 6,878,708 8,021,318 6,780,043 21,680,069 Total 132,826,885 100,867,584 266,422,773 500,117,242 2008 Central Eastern Western Total LPG 2,623,283 4,865,116 5,517,106 13,005,505 Gasoline 49,713,501 27,451,603 59,531,359 136,696,463 Jet Fuel/Kerosene 7,162,001 2,865,292 12,607,278 22,634,571 Diesel 63,686,615 45,953,657 98,541,006 208,181,278 Fuel Oil 609,864 9,223,992 103,484,969 113,318,825 Asphalt & Misc. 7,314,453 8,942,001 6,508,872 22,765,326 Total 131,109,717 99,301,661 286,190,590 516,601,968 Source: Saudi Aramco Annual Review (2009). Reference List Jaffe.J. and Elass, J., 2007. “Saudi Aramco: National Flagship with Global Responsibilities”, in. International Energy Markets, James A. Baker III – Institute for Public Policy. Marcel, V., 2006. Oil Titans: National Oil Companies in the Middle East. Washington, DC: Brookings Inistitution Press. Saudi Aramco Annual Review. 2009. www.saudiaramco.com. Stecke, K. and Kumar, S., 2009. Sources of Supply Chain Disruptions, Factors That Breed Vulnerability, and Mitigating Strategies Journal of Marketing Channels, 16 (3), 193-226 Vitalis, R., 2006. America's Kingdom: Mythmaking on the Saudi Oil Frontier. Stanford: Stanford University Press. Read More